In Re Northern Merchandise, Inc.

371 F.3d 1056 (2004)

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Nature of the Case

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Facts

Northern (Debtor), a company that sold general merchandise to grocery stores, was incorporated by Paul Weingartner, Gary David, and Paul Benjamin. D loaned $60,000 to the company evidenced by a promissory note in the amount of $60,000, secured by a commercial financing agreement granting D a security interest in Debtor's inventory, chattel paper, accounts, equipment, and general intangibles. The security interest was perfected by the filing of a Uniform Commercial Code financing statement on February 24, 1998. In October 1998, Debtor sought a second loan of $150,000. D refused but agreed to loan $150,000 to Paul Weingartner, Paul Benjamin, and Stephen Comer, Debtor's shareholders, whose credit warranted such a loan. D understood that the Shareholders would, in turn, allow Debtor to utilize the money to fund its business operations. D deposited the proceeds of the October Loan directly into Debtor's checking account. The transaction was documented as a loan to Shareholders, who then turned the funds over to Debtor. The October Loan was evidenced by a promissory note in favor of D executed by Shareholders. The same day, Debtor executed a commercial security agreement granting D a security interest in its inventory, chattel paper, accounts, equipment, and general intangibles. On March 5, 1999, Debtor ceased doing business, with $875,000 in unsecured debt. Debtor had $400,000 worth of inventory. Debtor transferred the $400,000 worth of inventory to a company owned by shareholder Paul Benjamin, for $125,000. On March 19, 1999, Benjamin News Group paid D, not Debtor, the $125,000, which amount was credited to the October Loan. The remaining $25,000 due on the October Loan was paid to D by another company from the proceeds of prior sales of inventory. On March 22, 1999, creditors filed Chapter 7, and a trustee (P) was appointed. Debtor showed assets of $4,116.17 and debts of $875,847.32. P sued D in that the $125,000 transfer was a fraudulent conveyance under § 548(a). The court agreed with P. The BAP affirmed. D appealed.